Tax on state pension in first year - again!

molerat

https://forums.moneysavingexpert.com/discussion/comment/81860704#Comment_81860704

It is not simply HMRC deciding how to tax it, they are taxing in accordance with statute law.

578Taxable pension income

If section 577 applies, the taxable pension income for a tax year is the full amount of the pension, benefit or allowance accruing in that year irrespective of when any amount is actually paid.

https://www.legislation.gov.uk/ukpga/2003/1/section/577

Jeremy535897

https://forums.moneysavingexpert.com/discussion/comment/81860765#Comment_81860765

Yes, but HMRC are happy to tax the taxpayer on what they received in the year. The taxpayer can insist on the statutory accruals basis. But HMRC insist on taxing state pension on the accruals basis.

dogfonos

Having spent a couple of hours on the 'phone to HMRC, PAYE and DWP yesterday, it's clear to me that there are inconsistencies in how the SP entitlement, and hence tax liability, is calculated.

A letter I received from HMRC correcting the original figure I submitted in my tax return for 2024 - 25, gave a SP entitlement of £9036.00. When I spoke with PAYE yesterday, they gave an entitlement of £9248.80 and when I spoke with DWP yesterday, they gave the sum as £9256.80 and explained they worked it out using whole week periods (seemingly rounding up to the nearest week?).

My own calculation of my SP entitlement for 2024 - 25 tax year exactly matches HMRC's figure when I base the calculation on days rather than whole weeks. When I use whole weeks (rounded up), my calculation exactly matches the DWP figure. Lord knows how the PAYE figure was calculated.

Because I reached state pension retirement age during the 2024 - 25 tax year, my first SP payment was, understandably, a fraction of the subsequent 4 weekly amount. The amount of first payment I received was based on the number of days (17 actually), not whole weeks, from my birthday to the next full 4 weekly SP payment and for the period between the last 4 weekly payment I received in the 2024 - 25 tax year and the start of the next tax year (18 days).

I don't know the source of HMRC's "official" SP entitlement figure. I'd guess it would be DWP and if that's the case, there could be inconsistencies in the way SP entitlement is presented.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81862459#Comment_81862459

When your State Pension first starts DWP provide HMRC with the weekly value.

https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye76070

polar_pig

dogfonos - It seems that your case seems very similar to mine, as:

a) you reached SPA during 2024/25,

b) you put in a figure in your SA for your SP and

c) subsequently HMRC corrected this figure.

May I ask a few questions...

If you calculate the total number of days from your 66th birthday to the next 5th April inclusive (i.e. your birthday is day 1 and 5th April is the last day) and then divide this by 7 to give you W whole weeks and D days, may I ask what number is D?

In my case D is 6 days (0.86 of a week)

Did you receive a Tax Code Notice for 2024/25 at any stage and if so did the figure they stated for your SP equal W multiplied by your weekly SP entitlement?

In my case it did.

To clarify, you're saying the HMRC correction to your SA did not equal W or W+1 whole weeks of entitlement but instead equalled W weeks *plus* D days of entitlement. Is this correct?

In my case it equalled W+1 weeks.

Yes, like me (and others) your first SP payment was for an exact number of days of entitlement from the 66th birthday to the first payment date. I believe this is normal.

dogfonos

"a) you reached SPA during 2024/25,

b) you put in a figure in your SA for your SP and

c) subsequently HMRC corrected this figure."

Yes to all.

"If you calculate the total number of days from your 66th birthday to the next 5th April inclusive (i.e. your birthday is day 1 and 5th April is the last day) and then divide this by 7 to give you W whole weeks and D days, may I ask what number is D?"

That's D = 2 days.

"Did you receive a Tax Code Notice for 2024/25 at any stage and if so did the figure they stated for your SP equal W multiplied by your weekly SP entitlement?"

I've checked my tax files for 2023-24 and 2024-25 and there are no Tax Code Notices.

"To clarify, you're saying the HMRC correction to your SA did not equal W or W+1 whole weeks of entitlement but instead equalled W weeks *plus* D days of entitlement. Is this correct?"

Correct.

mybestattempt

@polar_pig

@dogfonos

It seems to me you have, perhaps, failed to understand that the 2024/25 tax code adjustment for the state pension starting during that tax year does not have to equate precisely with the amount which ultimately will be assessable on the statutory acruals basis.

PAYE Regulation 14(1)(g) only requires the adjustment to the tax code for an amount to "secure as far as possible" that the correct amount of tax is deducted via the PAYE source which applies the tax code.

When you make your self assessment return for 2024/25, any tax code for that year is now irrelevant and the amount of state pension which is assessable on acruals basis, in accordance with Section 578 ITEPA 2003, must be included.

So, you either agree with the correction HMRC has made to your self-assessment or you don't.

polar_pig

Thanks for all the inputs. It seems that from a small number of personal experiences on this thread and elsewhere, we can't deduce the calculation HMRC uses for taxable SP in a Self Assessment, as results differ.

ITEPA 2003 — Section 578 states "the taxable amount is the amount of pension accruing in the tax year. This may be different from the amount actually paid in a tax year." Fine, it's their choice and we have to live with it. Although, should they have made the taxable amount equal to the SP payable instead, like other income sources, the taxpayer could easily check the figures ensuring that many more SA returns were accepted without the need for correction.

According to ChatGPT: There is no HMRC or government document in public guidance or legislation that definitively states for all taxpayers whether state pension accrual should be:

a) Weekly Rounded down,

b) Weekly Rounded up,

c) Weekly counting the number of 'payment days of the week', or

d) Calculated on exact days and pro-rated.

The only other document that perhaps gives some indication as to how HMRC view this is the HMRC PAYE Manual — PAYE76086. Though this is an internal document and *not* legislation. Here it explicitly states that it is rounded down for the purpose of tax code adjustment for the state pension.

In the absence of clarity, many, myself included, have used this figure for their SA return.

mybestattempt

PAYE Regulation 14(1)(g) only requires the adjustment to the tax code for an amount to "secure as far as possible" that the correct amount of tax is deducted via the PAYE source which applies the tax code.

Yes, I totally agree it doesn't have to "equate precisely". It is an estimate. Indeed there are a number of reasons why the Tax Code Notice SP may not be the same as the taxable amount at the year end. Nonetheless, should they have used the same method for the TCN as they use for the SA many more SA returns would be accepted without the need for correction.

mybestattempt

So, you either agree with the correction HMRC has made to your self-assessment or you don't.

Yes I agree, you either accept it blindly, or try to challenge it based upon an individual taxpayers interpretation of the unclear rules. Note that if you challenge it the justification they provide me for my SA as to why their figures are correct may, or may not, be the same as the justification they provide you for your SA. In any case, if you've under paid due to the unclear rules HMRC will most likely still look to recover the unpaid tax that they claim plus any interest due.

nottsdave59

I started receiving my state pension last year, and so have just experienced exactly this situation. I’ve spoken to both HMRC and DWP about it. I was told that HMRC must calculate the tax based on what DWP tell them. And DWP tell them how much state pension you were entitled to, not what you received. It seems incredible that the law is written in such a way that as a pensioner you are expected to pay tax on money you haven’t received in that tax year, just to make their calculations simpler!

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81898748#Comment_81898748

Have you quantified the actual financial impact for you, which should be minor? As you accept, it's the law, so if you consider it significant, lobbying your MP would be the way to go…